The iPhone 6s is just a few months old, but already rumors are swirling about Apple's (NASDAQ:AAPL) next handset. While the (presumably named) iPhone 7 will likely pack a number of new features, one of the more intriguing rumors surrounding the device centers on what it may lack.
Last month, Japanese blog Macotakara reported that Apple is preparing to eliminate the headphone jack on the iPhone. For now this remains a mere rumor, but it makes sense intuitively, and wouldn't be surprising. The 3.5 mm audio connector is tried and true, but downright ancient. Apple has never been shy about eliminating old technology (its Macs were among the first PCs to do away with floppy disk and CD drives), and by ditching the traditional headphone port, it could offer an iPhone with an even slimmer profile. Lightning-based headphones can offer a superior experience, and Bluetooth audio has come a long way in recent years.
Given the percentage of Apple's revenue the iPhone generates, the iPhone 7 will likely be the single most important product Apple releases next year. But if this rumor proves true, there's one company that stands to benefit even more: Skullcandy (NASDAQ:SKUL).
The only pure-play headphone company
The market for headphones is competitive, with a vast array of competing products. Apple has its own Ear Pods and the Beats brand. Sony remains a player, as does Bose, Audio-Technica, and Samsung, along with countless others. But none of these firms offer investors much exposure to the headphone market -- they're either privately held, or enormous consumer electronics conglomerates with many other, much more important products.
Skullcandy, however, is quite different. It's publicly traded, and derives almost all of its revenue from headphones, making it perhaps the best way to play a massive headphone upgrade cycle. Last quarter, a full 93% of its revenue came from the sale of headphones (the remaining 7% from Bluetooth speakers and accessories). Skullcandy does sell expensive sets, but most of its models are affordable, typically retailing between $20 and $100. It sells both wired and wireless headphones. Earlier this fall, it introduced the Uproar Wireless Bluetooth-equipped headphones. At $49.99, they're one of the most affordable sets of Bluetooth headphones available to consumers, and they've received generally favorable reviews. PCMag described them as "excellent."
Apple could increase demand for Bluetooth headphones
Bluetooth headphones are nice to have (who likes wires?), but they're not a necessity -- at least not for now. Yet for tens of millions of consumers, a headphone jack-less iPhone could entice them to purchase a pair.
Apple could bundle a pair of Lightning-equipped Ear Buds with the iPhone 7, or sell an adapter, but neither is an ideal solution. The quality of Apple's Ear Buds is widely considered horrific (Gizmodo described them as "garbage"), and Apple has a history of demanding exorbitant prices for its adapters: its 30-pin-to-Lightning adapter retails for $29.99, almost as much as Skullcandy's Uproar.
Apple is expected to sell around 70 million iPhones this quarter. Exactly how many will be current models it won't say, but a large percentage of buyers will likely choose the iPhone 6s or iPhone 6s Plus. The same is likely to hold true next year with the iPhone 7. That could mean tens of millions of buyers for Skullcandy's Bluetooth headphones -- enough to propel the company's sales, which totaled just $67.2 million last quarter. And once Apple does away with a port, it's not likely to bring it back. Additional iPhone models would also presumably lack the headphone jack, and as newer models slowly filter into the installed base, the demand for Bluetooth headphones could stay elevated for several years, particularly if Apple's Android-based competitors follow suit.
Without confirmation, it may be too dangerous to wade into Skullcandy at this point. The stock has largely been a disappointment since its IPO, and is down almost 50% in 2015 alone. Yet Skullcandy will remain on my watch list. Come next September, it could be one of the biggest winners of the iPhone 7's unveiling.